Midterm 2 Practice Questions
When using absorption costing and explaining changes in operating income, financial statement users need to be aware of changes in ____ levels.
Inventory
Under absorption costing, fixed manufacturing overhead accumulates in which accounts until units of product are sold?
Inventory (on the balance sheet)
Segmented income statements:
May be prepared for activities at many levels in a company
Activity cost pool
amount of costs accumulated for a single activity
Duration driver
amount of time to perform an activity
what are ways to calculate the benefit of selecting one alternative over another?
analysis that just looks at the relevant costs and benefits; the difference between the net operating income for the 2 alternatives; an analysis that looks at all costs and benefits and identifies those that are differential
order to create the equation used to calculate the simple rate of return
annual incremental net operating income/initial investment
Comparing the performance within an organization to that of other similar organizations is called:
benchmarking
the machine or process that is limiting overall output is called a ___.
bottleneck
joint costs:
can't be avoided once a process is started; irrelevant in decisions regarding what to do with a product after split-off
how managers plan significant investments in projects with long-term implications is called ____ ___.
capital budgeting
the payback method, net present value method, and internal rate of return method all focus on analyzing the ___ ___ associated with capital investment projects
cash flows
when interest is paid on interest it is called ___ interest.
compound
when a limited resource of some type restricts a company's ability to satisfy demand, the company has a ___.
constraint
A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in:
contribution margin
when a constraint exists, companies need to focus on maximizing
contribution margin per unit of constraint
working capital
current assets minus current liabilities
the net present value of a project is:
difference between the present value of cash inflows and present value of cash outflows for a project; used in determining whether or not a project is an acceptable capital investment
what are synonyms for avoidable cost?
differential cost; incremental cost
What should be included in the analysis when making a decision?
differential costs; opportunity cost; relevant costs; avoidable costs
In the 19th and 20th centuries:
direct labor hours was a satisfactory overhead allocation base
In the ease of adjusting coding scheme, what are usually considered Yellow costs?
direct labor; factory utilities
In the ease of adjustment coding scheme, what is usually considered Yellow costs?
direct labor; factory utilities
when making decisions, managers should ignore ___ costs.
irrelevant
External reports are ___ detailed than internal reports.
less
Under activity-based costing, non manufacturing costs:
may be allocated to products based on cause
Under activity-based costing, nonmanufacturing costs:
may be allocated to products based on cause
if a cost is traced to a segment using ABC, it:
may or may not be an avoidable cost of the segment
the required rate of return is the ___ rate of return a project must yield to be acceptable.
minimum
one dollar earned today is worth:
more than one dollar earned at future point in time
any final decision to drop or add a business segment is going to hinge primarily on the impact the decision will have on net ___ ___.
operating income
working capital required is a cash ___, but working capital released is a cash ___.
outflow; inflow
Usually, traditional costing ___ high-volume products and ___ low-volume products.
overcosts; undercosts
In ABC, first-stage allocation assigns ___ costs to activity cost pools.
overhead
the factor of the internal rate of return for a capital investment project is 4.329. if the equal annual cash flows for the project are expected to last 5 years, which of the following tables can be used to find the internal rate or return?
present value of an annuity
What helps companies channel their resources into the most profitable growth opportunities?
product and customer profitability reports
The most common management reports using ABC data are:
product profitability; customer profitability
The most common management reports using ABC reports using ABC data are:
product profitability; customer profitability
Under activity-based costing ____ and ____ costs may be assigned to products on a cause-and-effect basis.
product; period
the 2 broad categories into which capital budgeting decisions fall are ___ and ___ decisions.
screening; preference
Activity rates are used to apply overhead costs to products and customers in the ___-stage allocation
second
ABC uses activity rates to apply overhead costs to products in ___ allocation
second-stage
In the ease of adjustment coding scheme, what are considered Green costs?
shipping; direct materials
which term refers to a company that is involved in more than 1 activity in the value chain?
vertical integration
Traditional cost systems allocate all manufacturing costs using ___ allocation bases.
volume-related
Costs that can be easily traced to individual products include:
warranty repair costs; shipping costs; sales commission
when should a special order be accepted?
when the incremental revenue from the special order exceeds the incremental costs of the order
Is building lease example of red cost?
yes
A segment's contribution margin:
Is useful for decisions impacting temporary uses of capacity
Why is top management support needed when ABC is implemented?
Leadership is instrumental in motivating employees to embrace ABC
When inventory decreases, net operating income under absorption costing will be ___ cost of goods sold under variable costing.
Less than
In a traditional absorption costing system all ___ costs are assigned to products.
Manufacturing
Activities such as research and development that aren't dependent on the number of units or batches are _____ - level activities.
Product
A cost pool including costs to entertain clients and make sales calls is a ___ activity.
customer-level
Automation in manufacturing has led to:
decrease in direct labor as a percentage of total cost; increase in overhead costs
the present value of an amount to be received in the future is also known as the ___ ___ of the future cash receipt.
discounted value
calculating the present value of money is referred to as ___ cash flows.
discountign
finding the present value of a future cash flow is called ____.
discounting
suppose that a project's net present value is negative, but the project would provide intangible benefits that haven't yet been estimated. to estimate the annual value of intangible benefits needed to accept the project, __ the negative net present value excluding intangible benefits by the ___.
divide; present value factor for an annuity
Activity-based management is focused on:
eliminating waste; reducing defects
ABC uses more cost ___ than traditional costing.
pools
screening decisions
relate to whether a proposed project is acceptable
Is shipping cost example of yellow cost?
yes
steps used to calculate net present value in the correct order:
1) determine the discount rate using the minimum required return; 2) find the PV factors using the discount rate and timing of each cash flow; 3) multiply all project cash flows by the present value factor; 4) find the difference between the PV of cash inflows and cash outflows
If a segment is eliminated, ___ fixed costs that are not traced to the segment will not change.
Common
One mistake companies make when preparing segmented income statement in arbitrarily assigning ___ fixed costs to segments.
Common
When a segment is eliminated, a:
Common fixed cost will remain unchanged; Traceable fixed cost will disappear
Manufacturing cost per unit of a product under variable costing are:
Direct labor, direct materials and variable overhead
When using variable costing, fixed manufacturing overhead is:
Expenses in the period incurred
True or False: When calculating the segment margin, both traceable and common fixed costs are charged to the segment.
False
True or false: It is easy to determine whether a cost should be classified as traceable or common.
False
True or false: in an ABC system, it is best to combine activities that aren't highly correlated.
False
In the ease of adjustment coding scheme, which type of cost automatically adjusts to changes in activity without management action?
Green cost
An absorption costing income statement calculates:
Gross margin by deducting cost of goods sold from sales
Net operating income under absorption costing is generally ____ net income under variable costing in periods in which inventory increases.
Higher than
Segment break-even calculations include:
Only traceable fixed expenses
Costs should be allocated to segments for internal decision-making purposes:
Only when the allocation base actually drives the cost being allocated
What types of activities are carried out regardless of which customers are served, which products are produced, how many batches are run or how many units are produced?
Organization-sustaining
Activity-based costing uses numerous ____ cost pools.
Overhead
Under both variable costing and absorption costing, variable and fixed selling and administrative costs are treated as ___ costs.
Period
Variable costing advocates believe that, under the matching principle, fixed costs should be treated as ____ costs.
Period
When allocating fixed manufacturing overhead cost to units under absorption costing, the total fixed overhead costs must be divided by the number of units:
Produced
A product's ___ is a function of sales and the direct and indirect costs that the product causes.
Product margin
GAAP and IFRS rules:
Requires segmented financial data be included in annual reports; Require that the same method be used for both internal and external segment reporting; Create problems in reconciling internal and external reports
Costs that can be traced directly to a segment:
Shouldn't be allocated to the other segments
Direct costing or marginal costing are other terms for ___ costing.
Variable
Fixed manufacturing overhead is treated as a period cost and expenses in full each period
Variable costing
Costs are separated between variable and fixed expenses when using ___ costing, whereas ___ costing separates costs between product and period
Variable; absorption
When should a segment be discontinued?
When the segment margin is negative; When the segment contribution margin doesn't cover the traceable fixed costs
For external reporting purposes, manufacturing companies generally prepare ___ costing income statements, but ____ costing is often used for internal reporting purposes.
absorption; variable
Which departments should be included in the design of an ABC system?
accounting; marketing; engineering
An ABC ____ ___ report involves more overhead cost detail than a conventional ABC analysis.
action analysis
What report shows the costs assigned to cost objects and the difficulty in adjusting the cost for changes in activity?
action analysis report
Focusing on activities to eliminate waste, decrease processing time, and reducing defects is the basis of ___-___ ___.
activity based management
what assumption underlies net present value analysis?
all cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate
what is the typical approach to allocating joint costs to products?
allocating the cost based on the relative sales value of the end products
An activity measure is an ___ base in an ABC system.
allocation
when a project with a negative NPV has significant intangible benefits, the:
annual intangible benefit necessary to make the investment worthwhile should be calculated
joint costs incurred prior to the split-off point ___ relevant in decisions regarding what to do from the split-off point forward.
aren't
ABC isn't used for external reporting because ___ wouldn't be comfortable using allocation based on employee interviews
auditors
Which group is like to be uncomfortable using ABC allocations that are based on personnel interviews?
auditors
cost of capital
average rate of return that must be paid for long-term creditors and shareholders for use of their funds
a cost that can be eliminated by choosing one alternative over another is an ___ cost.
avoidable
Setting up equipment, placing purchase orders, and arranging shipments to customers are all examples of ___-level activities
batch
why must future cash flows relating to a capital investment be discounted when calculating the net present value of the investment?
because of the time value of money, future cash flows must be discounted to be comparable to other cash flows
Variable costing net income may be computed by multiplying the number of units sold by the _____ _____ per unit and subtracting total ___ expenses.
contribution, margin, fixed
An activity ___ pool relates to a single activity measure in the ABC system.
cost
Activity measure
cost driver
because of the time value of money, projects that promise ___ returns are preferable to those that promise the opposite.
earlier
what is an advantage of buying a part instead of making it?
economies of scale can result in higher quality and lower costs from suppliers
A product profitability report:
excludes costs not caused by specific products
Types of costs that might be included in a cost pool based on order size include:
factory supplies; equipment depreciation
True or false: opportunity costs aren't found in accounting records because they aren't relevant to decisions.
false
True or false: the benefits of increased accuracy from ABC always outfights the costs
false
true or false: when a capital investment decision is being made between 2+ alternatives, the project with the shortest payback period is always the most desirable investment.
false
the basic premise of the payback method is the ___, the more desirable the investment.
faster the cost of the investment is recovered
one of the great dangers in allocating common ___ costs is that such allocations can make a product line look less profitable than it really is.
fixed
when making a capital budgeting deacon, it is most useful to calculate the payback period:
if a company is "cash poor"; as part of the screening process
when the total amount of the cost will be the same regardless of the alternatives selected in a decision, what should be done about the cost in the decision analysis?
ignore the cost
the simple rate of return:
ignores the time value of money; fluctuates from year to year along with fluctuations in revenue and expense
Computing overhead costs to be assigned to products for an action analysis report:
includes a cooler-coding scheme to help with adjustments; results in a cost matrix
what is the best way to make use of a constrained resource?
increase the capacity of the bottleneck
typical cash inflows from a project include:
increased revenues; released working capital; salvage value
when a product is past the split-off point, but isn't yet a finished product, it's called an ___ product.
intermediate
as it applies to sell or process further decisions, which term refers to a product that is in the process of being made?
intermediate product
the ___ rate of return focuses on cash flows, while the ___ rate of return on revenue and expense.
internal; simple
In ABC, first-stage allocations are usually based on the results of:
interviews with employees
using the following items to create the equation used to calculated the payback period when annual net cash inflow is the same every year.
investment required/annual net cash inflow
capital budgeting decisions:
involve an immediate cash outlay in order to obtain a future return; require a great deal of analysis prior to acceptance
when using net present value to compare projects, the total cost approach:
is the most flexible method available to compare projects; includes all cash inflows and outflows under each alternative
when the outcomes of the net present value method and the internal rate of return method don't agree:
it is best to rely on the net present value method
the costs incurred up to the split-off point in a process in which 2+ products are produced from a common input are known as ___ costs.
joint
the split-off point is the point in the manufacturing process at which the ___ products can be recognized as separate products.
joint
2 or more products produced from a common input are:
joint products
In the 19th and 20th centuries, cost systems relied on allocation bases such as:
labor hours and machine hours
what may be advantages of making a part rather than buying it?
less dependable on outside suppliers; smoother flow of parts and materials for production
if a company has more than one potential constraint, the proper combination of products can be found by use of a quantitate method known as ___ ___.
linear programming
a decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier is called a ___ or ___ decision
make; buy
In traditional costing, ___ costs are assigned to products.
manufacturing
Costs assigned and/or traced when computing product margin in a traditional cost system are:
manufacturing overhead; direct material; direct labor
costs that are relevant in a given decision situation:
may not be relevant in another decision situation
Compared to traditional systems, activity-based costing uses ___ cost pools and unique measures of activity.
more
what are the most common measurement used to rank acceptable investment projects?
net present value and internal rate of return
2 capital budgeting approaches that use discounted cash flows are the __ ___ value method and the ___ ___ of return method
net present; internal rate
Transaction driver
number of times an activity occurs
For what reasons is an ABC system more costly to maintain than traditional costing systems?
numerous activity measures must be collected and checked; numerous activity measures must be entered into system
For what reasons in ABC system more costly to maintain than traditional costing systems?
numerous activity measures must be entered into system; numerous activity measures must be collected and checked
the computation of a capital budgeting project's incremental net income includes:
one-time expenses; annual depreciation expense; annual revenues
if a company has a resource that could be used for something else, the ___ cost is the profit that could be derived from the best alternative use of the resource.
opportunity
the length of time that it takes for a project to recover its initial cost from the net cash inflows that is generates it the ___ ___.
payback period
To assist in 1st-stage allocation in ABC, employees designated as indirect factory workers should provide the:
percentage of employee time spend for each activity pool
Activity-based costing only charges products for the cost of the capacity used because:
products are only assigned the costs of resources they actually use; results in a more stable unit product cost
The most common reports prepared using ABC data are the product and customer ____ reports.
profitability
acceptable project with a net present value of zero
project promises a return equal to the required rate of return
acceptable project with a positive net present value
project promises a return greater than the required rate of return
unacceptable project with a negative net present value
project promises a return less than the required rate of return
the basic premise of the payback method is that the more ___ the cost of an investment can be recovered, the more desirable the investment is.
quickly
preference decisions
relate to selecting from among several acceptable alternatives
it is often possible for a manager to increase the capacity of a bottleneck, which is called ___ the constraint
relaxing
what involves increasing the capacity of a bottleneck?
relaxing the constraint
only rarely will enough information be available to prepare a detailed income statement for both alternatives in a decision. this makes isolating ___ costs desirable.
relevant
only those costs and benefits that differ in total between alternatives are ___ in a decision.
relevant
when planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a ___ cost.
relevant
When making a decision to either go to a movie or rent a DCD, choosing a movie instead of the DVD means that the cost of renting the DVD would be eliminated. This is an example of:
relevant cost; avoidable cost
Yellow costs:
require management action in order to make adjustments to changes in activity
What is the benefit of a cross-functional team designing an ABC system?
resistance to change is reduced
it is profitable to continue processing a joint product after split-off point, so long as the incremental ___ from such processing exceeds the incremental processing cost incurred after the split-off point.
revenue
Customer-level activities include:
sales calls; mailing catalogs
Individual customer ___ minus individual customer ___ equals customer margin.
sales; costs
what is not a typical cash outflow associated with an investment in equipment?
salvage value of old equipment
one of the two broad categories of capital budgeting decisions, a ___ decision, relates to whether a proposed project is acceptable based on a preset criterion.
screening
deciding what to do with a joint product at the split-off point is a ___ or ___ ___ decision.
sell; process further
what are ways to increase the capacity of a bottleneck?
shifting workers from processes that aren't bottleneck to the process that is bottleneck; investing in additional machines at the bottleneck
a 1-time order that isn't considered part of the company's normal ongoing business is referred to as ___ ___ decision.
special order
the capacity of a bottleneck can be effectively increased by:
subcontracting some of the processing that would be done in that area; focusing business process improvement efforts on the bottleneck
To reconcile ABC product margin to net income:
subtract overhead costs not assigned to products
a cost that has already been incurred and can't be avoided regardless of what a manager decides to do is a ___ cost.
sunk
An ABC system usually ____ a traditional cost system
supplements
the required rate of return is:
the minimum rate of return a project must yield to be acceptable
the internal rate of return method indicates:
the rate of return promised by an investment project over its useful life
the most effective way to strengthen a chain is to focus on:
the weakest link
true or false: the monthly fee that a student pays to park at school isn't relevant when deciding whether to take a train or drive for a weekend trop to visit an out-of-town trip.
true
What pieces of information are provided in product and customer profitability reports?
unprofitable product lines; profitable product lines; unprofitable customers
a set of activities ranging from development to production to after-sales service is called:
value chain
Segment contribution margin equals segment revenue minus the ___ expenses for the segment.
variable
When preparing a segment income statement using the contribution format:
variable and fixed costs are listed in separate sections of the statement; cost of goods sold consists of only variable manufacturing costs
green costs:
automatically adjust to changes in activities
Red costs:
are the most difficult to adjust to changes in activity and require management action
Activities that occur regardless of which customers are served, which products are produced or how many batches are run or units made are _____ - _____ activities.
organization; sustaining
Under activity-based costing, overhead includes:
all indirect costs
Steps for implementing ABC in order:
1. define activities, activity cost pools, and activity measures; 2. assign overhead costs to activity cost pools; 3. calculate activity rate; 4. assign overhead costs to cost objects; 5. prepare management reports
Advocates of ____ costing believe fixed costs are an essential part of product production.
Absorption
In order to comply with GAAP and IFRS, the ____ costing method must be used for external reporting in the US.
Absorption
The use of ____ costing can lead to the omission of segment costs because nonmanufacturing costs aren't included as costs of a product.
Absorption
Variable and fixed cost distinctions are ignored when a company prepares income statements using ______ costing.
Absorption
Fixed manufacturing overhead is treated as part of the per unit product cost and expenses as units are sold.
Absorption costing
Advocates of variable costing believe fixed manufacturing costs:
Are period expenses; aren't caused by and can't be meaningfully traced to specific units of production
Bart's Inc. operates retail stores in various cities. Segmented income statements are prepared for each store and for each product line in each store. The property tax for the store is a(n) ___ fixed cost for the store, and a(n) ___ fixed cost for each product line sold in the store.
Traceable; Common
Which costing method assigns only manufacturing costs to products?
Traditional absorption costing
True or False: under absorption costing, fixed overhead is treated like a variable cost because a portion of the total cost is allocated to each unit produced, rather than being expensed as one large sum.
True
True or false: In an automated environment, using traditional allocation bases based on volume may distort unit product costs.
True
salvage value
funds gained from the sale of a capital asset
initial investment
funds needed to purchase a capital asset or being a capital investment project
A company with three segments has $10,000 in common fixed expenses. All three segments are at the break-even point. As a result, the company:
has an overall net operating loss of $10,000
managers may choose to retain an unprofitable product line because it:
helps sell other products; attracts customers
When using a traditional cost system, standard, ___-volume products are generally overcosted and custom, ___-volume products are often undercosted.
high; low
the rule used when comparing competing investments is the ____ project profitability index, the more desirable the project.
higher
to maximize total contribution margin when a constrained resource exists, produce the products with the:
highest contribution margin per unit of the constrained resource
The first major step when implementing an ABC system is:
identify the activities
ABC can only be successful if it has full support from ___ ___.
top management
What are the same under both ABC and traditional costing?
total costs; net operating income; total sales
Only direct materials, direct labor, and manufacturing overhead are assigned to products under a ____ costing system.
traditional
Which costing system doesn't assign selling and administrative costs to products when computing product margin?
traditional
What causes traditional and activity-based costing systems to report different product margins?
traditional cost systems allocate all manufacturing overhead costs to products; traditional cost systems allocate all of the manufacturing overhead costs to products using a volume-related allocation base; the ABC system assigns non manufacturing overhead costs to products on a cause-and effect basis as appropriate
Simple counts of the number of times an activity occurs are ___ drivers.
transaction
The term ___ ___ is also used when referring to an allocation base or activity measure in activity-based costing.
transaction/cost driver
true or false: in order for a series of cash flows to be an annuity, the cash flows must be identical amounts
true
true or false: mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.
true
Discontinuing a profitable segment results in:
The loss of the segment's revenues; A reduction in the overall profits of the company
Differences in net operating income between absorption costing and variable costing is due to the:
Timing of when fixed manufacturing overhead is expensed
When computing a segment margin, only ___fixed costs are charged to the particular segment.
Traceable
True or false: activity-based costing can be used for process improvement.
True
True or false: as the number of activities increases, the cost to implement an ABC system also increases.
True
All manufacturing costs are assigned to products in ___ costing.
absorption
Redeploying resources is only beneficial if the resources are shifted to the:
work center at full capacity
In the ease of adjustment coding scheme, ___ costs can adjust in response to changes in activity, but require management action.
yellow
The action analysis report:
identifies costs that have been assigned to a product; provides better information for decision making than a traditional cost system; shows how difficult it would be to adjust costs given changes in activities
Why is CVP analysis more difficult when using absorption costing than when using variable costing?
CVP analysis requires costs to be broken down between variable and fixed which isn't done in absorption costing
What is the order to construct a contribution format income statement?
Sales, variable expenses, contribution margin, fixed expenses, and net operating income
Arbot Co. manufactures appliances at 3 manufacturing facilities in the US. Each location has a plan manager who oversees the manufacturing process for that location. Segmented income statements are prepared for each plant and for each product manufactured in the plant. The salary of each plant manager is a:
Traceable fixed cost to the plant and a common fixed cost for the individual product lines made in the plant
Is selling expense example of yellow cost?
Yes
Power to run production equipment would be an ___-level activity.
unit
Decision-making problems that could occur when using absorption costing include inappropriate ___ decisions, and decisions made to ____ products that are, in fact, profitable.
Pricing; Drop
When the number of units produced equals the number of units sold:
Under both absorption costing and variable costing, all fixed overhead incurred flows to the income statement; Absorption costing net income is equal to variable costing net income
Under absorption costing, fixed manufacturing overhead costs flow to the income statement when:
Units are sold
When using absorption costing, fixed manufacturing overhead cost per unit = Total fixed manufacturing overhead divided by:
Units produced
Which costs are assigned to cost objects and how difficult it would be to adjust the cost if there were a change in activity are shown on the ___ ___ report
action analysis
Before a deciding to drop a product line:
both costs that can be avoided and costs that will continue need to be identified
If ABC isn't implemented correctly and organization-sustaining costs are included in product costs, then period costs will be ___ and margins will be ____.
overstated; understated
In ABC, any event that causes consumption of overhead resources is an ___.
activity
Overhead includes both manufacturing and non manufacturing costs under:
activity-based costing
How easily the cost could be adjusted to a change in activity is reflected in the ease of ___ code.
adjustment
A company's operations can be divided by product lines, geographic areas, manufacturing plants, service centers, or sales territories, which are known as:
segments
An activity-based costing system:
uses numerous overhead cost pools; may exclude some manufacturing costs from product costs
